WESTERN SNAPSHOT, APRIL 2008

San Jose, California, Office Market

Fox

After a robust 2007, commercial real estate activity in Silicon Valley, including the San Jose market, is entering a quiet period. Economic uncertainty, coupled with volatility in the capital and equity markets, has shaken business confidence. Executives are proceeding with caution, seeking to conserve cash and make prudent decisions regarding real estate — ensuring flexibility is a priority — and other significant capital outlays, including hiring.

The downtown San Jose office market improved markedly in 2007, with Class A availability equaling 17.4 percent at the close of the fourth quarter, as compared to 22 percent in mid-2006, and total leasing activity equaling 609,500 square feet, an increase of 78.9 percent from a year ago.

However, as first quarter 2008 unfolds, it’s clear that the momentum has slowed. Overall net absorption registered a negative 10,899 square feet as of mid-February. For now, rental rates remain firm with an overall average asking rent of $2.25 per square foot, full service, and an average Class A asking rate of $2.55 per square foot, still 30 percent below that of the competing Class A submarkets of Sunnyvale and Cupertino, California.

Davis

Additionally, the San Jose market overall possesses the region’s largest supply of available Class A office and R&D space, and provides a wide range of opportunities for tenants. A number of significant fourth quarter 2007 transactions occurred in this submarket including Pillar Data Systems occupying 79,748 square feet at 2840 Junction Ave. in San Jose, the largest transaction in the fourth quarter; ICTV for 39,340 square feet at RiverPark Tower I in downtown San Jose; Verizon for 29,179 square feet at 2560 N. First St. in North San Jose; and Gni for 20,410 square feet at 75 E. Santa Clara St. in downtown San Jose.

As the credit crisis gained traction in the commercial property sector, the investment sales market slowed dramatically, in striking contrast to the hyperactivity of a year ago. The growing reluctance of lenders to extend credit for properties in any sector of the real estate marketplace has caused a number of owners to pull their office buildings from the market.

San Jose is making significant strides in fueling business growth. The city provides a number of incentives to attract businesses and developers, including the Special Tenant Improvement Program, which encourages companies to locate in vacant buildings within industrial and R&D uses, as well as office space in the downtown core. The program offers expedited plan review and construction tax suspension.

BEA’s acquisition of Sobrato’s Tower at 488 Almaden Blvd. in March 2007 and the relocation of its headquarters downtown were heralded as a linchpin in the city’s revitalization plans. However, with Oracle’s subsequent acquisition of BEA, the company’s occupancy plans are now in question. However, Legacy has broken ground on RiverPark II, a 319,000-square-foot tower next to RiverPark I. Scheduled for delivery in April 2009, the start of this project is considered a positive signal for downtown.

In addition to financial and other concrete incentives, San Jose’s leadership is developing a number of programs to create a livable, vibrant and leading-edge community. Mayor Chuck Reed has established the “Green Vision” initiative, a comprehensive strategy that will demonstrate how environmental responsibility makes financial sense and stimulates economic opportunity. The vision includes 10 distinct goals that will serve as a roadmap to reduce the carbon footprint of the 10th largest city in the nation by more than half. The number one stated goal is to create 25,000 jobs in the “clean tech” industry, a business sector that is becoming increasingly vibrant in the valley. For example, venture capital investments in clean-tech companies reached a record level, $2.6 billion, during first the 9 months of 2007, with investment in solar technology, the majority of deals, totaling $664 million.

Another innovative effort underway is 1stAct (Arts, Creativity, Technology) Silicon Valley. Bruce Chizen, former CEO of Adobe Systems, which is headquartered downtown, is one of many prominent executives leading the charge to create a unique urban vision for downtown. The vision promotes a vibrant culture of creativity and fosters the concept of developing large projects that anchor the downtown core and smaller, lively communal spaces that complement the larger structures. Some of the larger projects include plans for Cesar Chavez Park, the South of First (SoFa) District, major retail developments and a future BART station.

San Jose tenants and investors are likely to exercise caution through the third quarter of 2008 as the credit crisis ripples through the commercial property sector, and economic drivers and market dynamics remain unsettled.

George Fox is executive vice president and co-branch manager and Elizabeth Davis is associate director of the Silicon Valley office of Studley.

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